Liquidity problems are likely to exist when a company's acid-test ratio:
A) Is substantially lower than 1.
B) Is less than the current ratio.
C) Equals 1.
D) Is higher than the current ratio.
E) Is higher than 1.

Question

Quizplus · Accepted Answer

The acid-test ratio, also known as the quick ratio, measures a company's ability to pay off short-term liabilities using its most liquid assets. An acid-test ratio that is substantially lower than 1 indicates that the company does not have sufficient liquid assets to cover its short-term liabilities. This suggests a liquidity problem, as the company may struggle to meet its obligations when they come due.

Liquidity Problems Are Likely to Exist When a Company's Acid-Test